IRS Begins to Audit Employment Taxes in 2010

06 January 2010 Publication
Authors: Carl D. Fortner Robert E. Goldstein Samuel F. Hoffman Zhu Julie Lee Belinda S. Morgan Isaac J. Morris Richard F. Riley Jr Mark T. Schieble Timothy L. Voigtman Lynette M. Zigman

Legal News Alert: Taxation

Late last year, the IRS sent notices to approximately 2,000 taxpayers as part of its Employment Tax National Research Project. In February 2010, the IRS will begin examining employers specifically targeting employment taxes: FICA, Social Security, Medicare, and federal income tax withholding. In addition, the IRS plans to audit approximately 2,000 additional taxpayers in each of 2011 and 2012. The IRS will use the results of these approximately 6,000 audits to gauge noncompliance and to determine specific noncompliant employment-tax issues.

This undertaking indicates the IRS may be more attentive to employment tax issues. As a result, taxpayers should consider examining their employment tax compliance and policies.

Generally, employment taxes on salaries are straightforward and in many cases, an outside payroll firm does this calculation. However, the application of employment taxes in less obvious situations may be problematic, and even the most diligent payroll and benefits departments might overlook these issues.

Employment tax-related issues may include:

  • Worker classification issues (employee versus independent contractor)
  • Fringe benefit issues, including:

    • Company-provided cars/mileage
    • Company-provided travel for spouse and family
    • Company-provided club memberships
    • Per diem reimbursements/adequate documentation policy for reimbursements
    • Reimbursement of legal fees and other indemnification payments
    • Company-provided computers
    • Company-provided cell phones
    • Personal usage of private aircraft
    • Company-provided gift cards and other taxable benefits
  • Nonqualified deferred compensation, constructive receipt issues, options, restricted stock, stock appreciation rights, and phantom stock
  • Reasonable compensation issues
  • Section 162(m) $1-million-deduction-limit issues
  • Section 280G “Golden Parachute” issues
  • Employment tax issues for non- U.S. citizens and non-residents of the United States
  • FICA tax issues and refund claims
  • Correction of payroll tax and reporting errors
  • Railroad Retirement Tax
  • Household employees 

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Carl D. Fortner
Milwaukee, Wisconsin
414.297.5739
cfortner@foley.com  

Robert E. Goldstein
San Diego, California
858.847.6710
rgoldstein@foley.com  

Samuel F. Hoffman
San Diego, California
619.685.6414
shoffman@foley.com  

Marsha E. Huff
Milwaukee, Wisconsin
414.297.5743
mhuff@foley.com  

Zhu Julie Lee
Milwaukee, Wisconsin
414.297.5504
zlee@foley.com  

Belinda S. Morgan
Chicago, Illinois
312.832.4562
bmorgan@foley.com  

Isaac J. Morris
Milwaukee, Wisconsin
414.297.4973
imorris@foley.com  

Dick Riley
Washington, D.C.
202.295.4712
rriley@foley.com  

Mark T. Schieble
San Francisco, California
415.984.9804
mschieble@foley.com  

James R. Spoor
Tampa, Florida
813.225.5442
jspoor@foley.com  

Timothy L. Voigtman
Milwaukee, Wisconsin
414.297.5677
tvoigtman@foley.com  

Lynette M. Zigman
Milwaukee, Wisconsin
414.297.5733
lzigman@foley.com  

Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.

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